Although it may not seem like a ‘big deal’ changing business processes to utilise a purchase card to make payments for items can actually make a great deal of difference to purchase costs and save companies a considerable amount of money.
How Do Purchase Cards Work?
A purchase card works by enabling a member of staff to make a payment using a credit card, as opposed to having to process paperwork (e.g. a Purchase order and a Purchase Invoice). These credit cards usually are used for smaller orders that do not have a high value and the credit card itself will not offer any extended credit limits and it can usually only be authorised for payments that are relatively modest.
For obvious reasons, staff will always have very strict guidelines as to what the card can and cannot be used for to prevent it being used fraudulently.
A purchase card also is slightly different from other types of credit cards because most purchase cards will provide a lot more details to the cardholder than a traditional credit card. So the cardholder will get more details of any transactions, including VAT details so that they have proper records of items bought. This information is often provided in electronic means so that it can be easily imported into your organizations accounts software package.
But the beauty of using a purchase card is that staff can simply use the card to make a purchase. They do not have to complete a form and then have it authorised, then pass this to the admin section who complete more forms and then place an order. In addition, using the usual system of buying, after the item arrives and there is even more filling out of forms and paperwork to complete and then payment has to be made.
This costs a company dear and using a purchase card takes all (or at least most of) the paperwork out of the process.
Savings from Purchase Cards use
Within the UK it was estimated that around 80% of all orders that an organisation raised actually represented only 20% of the total spend for the work involved. It became apparent that there was a lot of paperwork associated with orders, especially smaller orders that had less monetary value. For example in one organisation it was found that the levels of bureaucracy and paperwork were so high, that although an item cost 99p to purchase, the paperwork and forms that had to be completed, actually cost the organisation over £73! (Think for example how your organization purchases things like stationery, postage, fuel etc)
Obviously this is an extreme case of bureaucracy gone mad, but it is an interesting statistic and one that is surprisingly common.
When using a credit card the cardholder can either order over the internet or they can order on the telephone, but there are no forms to complete!
This saves a tremendous amount of time and since time actually costs money, it really is in the interests of any organisation to implement the use of purchase cards in order to save money, streamline services and ensure that staff time is spent productively, not being wasted on chasing a paper trail to order a few paperclips.
Suppliers also like purchase cards although they are charged by the bank for any transactions and there is a set up fee. However, because payments are made within a few days, they no longer have to wait for payments or chase up late payments.
Since suppliers know that they will get the money within a week, they are more likely to look favourably on any requests for a discount or special deal, although this obviously cannot be guaranteed. But many suppliers take the view that it is best to get some money in this week, rather than wait a few weeks for payments.
So there are very sound reasons for using a purchase card and given how much time they can save companies their use is likely to explode over the next few years.
